Misleading Inferences from Panel Unit-Root Tests with an Illustration from Purchasing Power Parity.

Simulations demonstrate that when unit-root behavior is rejected in a Levin and Lin panel test, it is incorrect to infer that all series are stationary. Recent tests proposed by Im, Pesaran and Shin, and by Sarno and Taylor, are also incapable of determining the mix of I(0) and I(1) series in a panel setting. This paper introduces a new unit-root test that allows the researcher to discern which series are I(0) and which ones are I(1). The test has double to triple the power of single-equation augmented Dickey-Fuller tests. Copyright 2001 by Blackwell Publishing Ltd.